Market | Segmentation

Market Segmentation. Dos and Don’ts

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Identifying market segments is one of the most difficult and time-consuming tasks for marketers and businesses. Still, market segmentation is of critical importance for a business to gain differential advantage over it competitors (McDonald and Wilson, 2016).

The issue this post tries to address is how to implement a method of market segmentation to be able to understand costumer/consumer behaviour.

The post starts from the assumption that there is no such a thing as objective ‘segments’ in the market and the societal world such as demographic, socio-demographic and geographic segments.

While providing a useful source of secondary information, these methods cannot say anything about the consumer behaviour, for they rely on a top-down, a priori approach that ignores:

  1. Costumer wants and needs.
  2. What drives such wants and needs.
  3. What differentiates them.

As McDondald and Wilson put it, ‘Boy George and the Archibishop of Canterbury are both socio-economic group A, but they don’t behave the same! Nor do all 18-to-24-year-old women (demographics) behave the same! Nor does everyone in one street (geo-demographics) behave the same!’ (2016, p. 90).

The same applies to such socio-demographic cohorts as ‘Millennials’, Generation X’, ‘Baby Boomers’ and the likes. These cohorts might certainly provide interesting information about each generation’s relationship with and use of digital technology.

Still, such cohorts cannot explain how needs and wants change between a 40-year-old who can afford a stay in a 5 star luxury hotel and a 40-year-old who cannot.

The way in which we conceive market segments largely depends on the way in which we conceive the market and the notion of segment itself.

According to McDonald and Wilson, a market is ‘the aggregation of all the products or services which customers regard as being capable of satisfying the same need’, whereas a segment is ‘a group of customers with the same or similar needs’ defining ‘many different purchase combinations within and across sectors’ (p. 89).

In the author’s view, which I subscribe, the perspective shift from a top-down (a priori segmentation) to a bottom-up (customer wants and needs) approach is at the basis of a more useful and telling methods of market segmentation. As a consequence, a SWOT analysis to be able to assess a firm’s strengths and weaknesses should focus on this latter’s capability to satisfy such wants and needs.

Russell I. Haley suggests an approach to market segmentation called ‘benefit segmentation’ (Haley, 1995) – which leads to similar conclusions as McDonald and Wilson’s.

According to Haley, benefits define market segments by causal factors, rather than descriptive factors. Simply put, a benefit-based approach is concerned with what customers and consumers actually seek in consuming a given product, thus providing a deeper insight into costumer and consumer’s behaviour.

‘Experience with this approach – the author explains – has shown that benefits sought by consumers determine their behaviour much more accurately than do demographic characteristics or volume of consumption’ (p. 60).

Focusing on toothpaste market, Haley identifies 4 major segments.

  • The Worriers. This segment contains a large number of families with children, whose parents are concerned about cavities. The members of this segment tend to be a little hypochondriacal and less socially-oriented than members of other segments.
  •  The Sociables. Members of this segments are very socially-oriented and outgoing. The segment comprises young married couples and swingers who are concerned with the brightness of their teeth.
  • The Sensory segment. Members of this segment privilege flavour and appearance of the product. A largely portion of the segment is made of children and, in more general terms, of more ego-centred people whose lifestyle is outgoing, even though not to the extent of the swingers.
  • The Independent segment. Members of this segment are mostly price-oriented, cognitive and independent men, who tend to see very little differences between brands and are, therefore, more likely to switch.

Raising the question of whether market segmentation still constitutes a viable way to understand consumer behaviour, Bailey, Baines, Wilson and Clark (2009) suggest that ‘segmentation has not been superseded as an actionable form of customer insight, but […] forms a key component of customer insight programmes’. Customer insight being defined as ‘a broader term encompassing  the domains of market research, segmentation and customer analytics based on a mix of transactional and external customer data’ (p. 17).

The cases analysed by the authors show that segmentation is most appropriate for proposition development, branding, pricing strategy and communication with new customers.  When it comes to real-time, one-to-one interactions with customers, the authors observe, more individualised methods of data collection such as CRM programmes constitute more efficient solutions to obtain valuable data on consumer’s wants and needs and gain deeper customer insights.

In conclusion, although socio-economics, demographic and geographic segmentation can provide a useful source of secondary information, an actionable method of segmentation needs to be concerned with consumer/customer needs and wants, along with the benefits they seek in buying and consuming a given product. For such needs, wants and benefits allow to identify the actual cause driving consumer behaviour. More individualised methods of data collection such as CRM programmes can also provide viable solutions to gain valuable customer insights when it comes to one-to-one interactions with customers.

 

Sources

Bailey C., Baines P.R., Wilson H., Clark M. (2009), ‘Segmentation and Customer Insight in Contemporary Services Marketing Practice: Why Grouping Customers Is No Longer Enough’. Journal of Marketing Management, Vol. 25, Issue 3 & 4, April, pp. 227-252.

Haley R. (1995), ‘Benefit Segmentation. A decision-oriented research tool’. Marketing Management, Vol. 4, N. 1, pp. 59-62.

McDonald M., Wilson H. (2016), Marketing Plans. How to prepare them, how to profit from them. Chichester: Wiley.

 

 

 

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